Tag Archives: markets

A large reason why the Clean Development Mechanism (a mandatory process for certifying carbon credits) never really took off was because of the bureaucracy and ambiguity behind the requirements of the process. Project developers never knew with certainty if their projects, whether a clean coal plant, an energy-efficient building or a renewable energy project, would absolutely qualify for credits.

Take the case of India. I worked for a company that manufactured wind turbines for the regional Indian market. The price of the turbines we sold ultimately relied on the project’s IRR which in turn relied primarily on the site’s wind characteristics. However, with intensifying competition, a significant portion of the developer’s return increasingly came from income derived from selling carbon credits. I have seen first hand how the reliance on carbon credits killed deals or gave false hope to developers on risky projects only to be let down during the certification process. To further exacerbate the situation, India offered tax breaks for such projects resulting in many poor projects being funded. This in turn created havoc on the grid’s capacity to handle renewable energy’s erratic supply.

The cases of Paredes and Dharavi are examples of a centralized approach to urban development. Both were led by private consortiums and supported by public-private partnerships. Both aimed to create a safer, more sustainable living and working environment for the people who would live there. And, as we discussed, both seemed destined to fail. However, I would argue that we should draw markedly different conclusions from these failures about the role of central planning in the growth of cities.

There are two kinds of cities in the world – those home to over 50% of the world’s population today, and those that will absorb nearly 100% of future growth for the next four decades (with a considerable degree of overlap). Cities like Bombay are adding over a thousand people per day – new neighborhoods springing up overnight. Governments are able to direct this growth to an extent through regulation (e.g., zoning) and the provision public services (e.g., mass transit). Markets do the rest.

In the case of Dharavi, markets may be enough, provided slum dwellers gain legal ownership over their homes. Offering land rights to families who have lived in the same home for generations is a complex process, but one with a relatively clear outcome – organic, continuous real estate improvement. When managing a built environment, the government has far greater constraint on sweeping public works projects. The process of razing thousands of homes and relocating thousands of families in Dharavi was virtually guaranteed to be corrupt and unpopular.

At the same time, markets seem to be bad at developing sustainable cities. As most industries have become more efficient, real estate development by some measures has become less so. Living PlanIt proposed to eliminate the massive waste endemic in traditional construction and urban design by building a ‘city’ from scratch. While they ran up against massive coordination and complexity problems, the idea was cogent. Centralized planning and development can ensure that the design and spacing of every building makes sense from an efficiency standpoint, and capture huge savings in reduced energy use and CO2 emissions. While there is a risk of building a ghost town (e.g., in China), there are ways to mitigate this risk (e.g., using large businesses as anchor tenants).

As governments look to create room for new urban populations, they would do well to review examples such as Living PlanIt and New Songdo City for inspiration. Greenfielding a city center is no easy task, but getting it right may be the best way to create a sustainable path for urbanization. For existing urban centers, government should focus on installing the right regulations and public services, rather than rebuilding from scratch.